PLEASE ANSWER ALL PARTS THEY ARE ALL PART OF 1 QUESTION please show all work !!!
ID: 2383199 • Letter: P
Question
PLEASE ANSWER ALL PARTS THEY ARE ALL PART OF 1 QUESTION
please show all work !!!
Today is January 1, 2014. Your friend Joe has just signed a contract to play for the Oil Kings. He will receive $900,000 for 2014, $1,000,000 for 2015, $1,100,000 for 2016, and $1,200,000 for 2017. All payments are made at the beginning of the year. Assume 8% annual interest rate (EAR).
a. What is the present value of his contract?
b. If instead of increasing annual payments Leo wants equal dollar amount month-end cheques, how large is his monthly pay (assuming the present value remains the same)?
Explanation / Answer
a. What is the present value of his contract? Year Cash flow PV @ 8% Present Value 2014 $900,000 $0.9259 $833,333.33 2015 $1,000,000 $0.8573 $857,338.82 2016 $1,100,000 $0.7938 $873,215.47 2017 $1,200,000 $0.7350 $882,035.82 Total present value $3,445,923.44 We have calculated Present value factors using excel function PV Rate 8% Nper for 1 year will 1, for 2 it will be 2 and so on PMT 0 FV -1 Type (beginning of the year) 1 b. Present Value $3,445,923.44 Rate 8% Nper 4 FV 0 Type (end of the year) 0 PMT calculated using PMT Function in excel $1,040,395.98
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